Costco (COST) plans to open a new warehouse location in China on Friday. This will be the company's third location there, with plans to open two more units this fiscal year. The bottom line: Costco seems serious about taking on Walmart's Sam's Club, which already has almost 40 stores in China.
Costco's new warehouse will be in Shanghai's Pudong, near the Disneyland Resort. Walmart's (WMT) Sam's Club has had a presence in China since 1996. It opened #39 last fall, demonstrating its "commitment to accelerating and deepening its growth throughout China," it said in at statement at the time.
CFRA analyst Arun Sundaram thinks there is room for both.
"The market is massive. Obviously, the Chinese economy is huge, so I think there's there's room for multiple competitors to be successful in China, so regardless of Sam's Clubs' growth strategy there, I think Costco will do well," he said.
Costco launched its first physical location in China back in 2019, which proved successful when approximately 200,000 members signed up in the first few months, surpassing its goal of 100,000. Costco’s second location then opened in 2021in Suzhou, a city west of Shanghai.
The location opening this week in Shanghai's Pudong already has more than 80,000 members signed up, according to the Global Times.
Now as it opens more locations in China, Costco executives seem aware that membership signups won't be as many as that initial blowout response.
"We signed up so many members in those first two warehouses," SVP Bob Nelson said In a call with investors following Costco’s fiscal Q3 2022, which ended March 31, 2022. He said with additional locations, "It's going to change the dynamics a little bit.”
Costco's fourth and fifth locations will be in Yinzhou, a district in the city of Ningbo, per its website.
In total, Costco touts 848 warehouses, including 584 in the United States, plus 264 international locations. Last quarter, Costco’s international business saw same-store sales up 3.8%.
Walmart, on the other hand, has 332 wholesale club locations internationally with its largest wholesale presence in Mexico (166 units). In Walmart's Q4 results, the company reported international same-store sales up 2.1%, noting "Walmex [Walmart in Mexico], China, and Canada led the way."
This membership-only model gives an edge over retailers. In recent years, other retailers are seeing significant pullback in the market like Carrefour along with its parent company in China, Suning.com, which seems to be closing its doors.
“If you're just a regular retailer, like a big-box retailer, you probably won't do that well in China, because that's such a mature market,” Sundaram said. CFRA holds a hold rating and $480 price target on shares of Costco, and a buy rating on shares of Walmart, along with a price target of $160.
A 'slow and methodical approach'?
Slow and steady wins the race? Maybe.
Sundaram said the measured approach that Costco used to enter the Chinese market was “smart.” Five years before it opened its first physical location there, it started introducing itself with e-commerce on sites like JD.com (JD) and a division of Alibaba (BABA) called Tmall.
E-commerce “was a way for them to really understand the Chinese consumer and learn...their shopping habits."
Sundaram mentioned a few risks too. They include China's regulatory environment, geopolitical issues following the U.S.-China trade war, and local competitors potentially having a better pulse on the consumer.
“There's this massive addressable market in China, but it comes with a lot of risks. That's why it makes sense to really test out the waters before making a huge upfront investment in China, which is why Costco, essentially, have been really slow and methodical in their approach to growth in China."
Why now is a good time for Costco to expand in China
And 2023 might be the right time to boost its presence in China, the problems with the U.S, aside.
This competition of wholesale retailers comes as the People's Republic expects GDP to rise around 5% this year, which means Chinese consumers may have more cash in hand. That, among other reasons, is why CFRA analyst Sundaram believes it's a good time for Costco to expand.
For one thing, the Chinese upper middle class is experiencing a “rapid rise" and consumers are intrigued by the concept of member-only shopping. “It seems as if the Chinese consumer is very receptive to these membership-only models, which I don't think that would have been the case, maybe, 10 to 15 years ago,” Sundaram said.
According to the 2023 McKinsey China Consumer Report, the upper-middle class is seeing double-digit growth and high-income households are "powering robust consumption growth."
Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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